The ratio of own and borrowed funds of the bank. The ratio between own and borrowed capital. Investment coverage ratio
The ratio of borrowed and own funds - refers to the coefficients of the financial stability of the enterprise. Shows how much borrowed funds per 1 UAH. own funds. It is also called gearing coefficient. It is equal to the ratio of the value of the company's liabilities to the value of its own funds.
Exceeding one in the value of the gearing coefficient means that for business, the borrowed capital of the organization is the main source of financing. High gearing indicates high risk.
The ratio of borrowed and own funds (Kz / s) is calculated by the formula:
Kz / s \u003d (P3 + P4) / P3
where P3 - long-term liabilities;
P4 - short-term liabilities;
P3 - capital and reserves.
Otherwise, it is (Total for section III Long-term liabilities + Total for section IV Short-term liabilities - deferred expenses - Deferred income) / (Total for section I Equity + Deferred income + Deferred expenses).
The more the coefficient exceeds 1, the greater the dependence of the enterprise on borrowed funds. The acceptable level is often determined by the operating conditions of each enterprise, primarily by the turnover rate. working capital. Therefore, it is additionally necessary to determine the turnover rate of inventories and receivables for the analyzed period. If receivables turn around faster than working capital, which means a fairly high intensity of receipts at the enterprise Money, i.e. as a result - an increase in own funds. Therefore, with a high turnover of material working capital and an even higher turnover of receivables, the ratio of own and borrowed funds can be much higher than 1.
The higher this ratio, the more loans the company has and the riskier the situation, which can eventually lead to bankruptcy. The high level of the coefficient also reflects potential danger the occurrence of a shortage of funds in the organization.
Thus, the ratio of borrowed and own funds reflects the general condition of the enterprise, determines its financial stability, i.e. shows how much the company can perform
The interpretation of this indicator depends on many factors, in particular, such as: the average level of this coefficient in other industries; the company's access to additional debt sources of financing; stability economic activity companies. Recommended value - should not exceed one.
A high dependence on external loans can significantly worsen the position of the organization in the event of a slowdown in the pace of implementation, since the cost of paying interest on borrowed capital is included in the group of conditionally fixed, i.e. such costs that, other things being equal, do not decrease in proportion to the decrease in the volume of sales.
In addition, a high debt-to-equity ratio may make it difficult to obtain new loans at the average market rate. This coefficient plays a crucial role in deciding on the choice of funding sources.
In the article, we will analyze the ratio of borrowed and own funds, its economic meaning and the formula for calculating the balance sheet.
Debt to equity ratio
Debt to equity ratio- characterizes the financial stability of the enterprise, and shows how much borrowed funds account for a unit of equity capital. This ratio reflects the capital structure and gives general characteristics about financial condition and represents the ratio of the borrowed (attracted) capital of the enterprise to its own. The indicator is calculated according to the balance sheet - Form No. 1.
The formula for calculating the ratio of borrowed and own funds
Normative value of the ratio of borrowed and own funds
The higher the value of the coefficient, the higher the risk of bankruptcy of the enterprise. High values of the ratio of borrowed and own funds (> 1) are allowed if the rate of circulation of receivables is higher than the rate of turnover of tangible working capital (cash is quickly received by the enterprise), then the ratio of borrowed and own funds may be higher than the standard. For each specific enterprise, its own acceptable level of the indicator is determined, the table below shows the values of the indicator and the characteristics of the financial condition.
One coefficient of the ratio of own and borrowed funds is not enough to assess the financial stability of the enterprise. In practice, additional indicators of financial independence are often calculated, one of the most common is the autonomy coefficient. Read more about it in the article "
Financial Stability Analysis: What is it?
Financial stability — component overall sustainability of the enterprise, balance financial flows, the availability of funds that allow the organization to maintain its activities for a certain period of time, including servicing loans received and producing products.
The main indicators of the financial stability of the organization
|
Index |
Description of the indicator and its normative value |
|
Autonomy coefficient |
The ratio of equity to total capital. |
|
Coefficient financial leverage |
The ratio of borrowed capital to equity. |
|
Working capital ratio |
The ratio of equity to current assets. |
|
The ratio of equity and long-term liabilities to total equity. |
|
|
Equity maneuverability ratio |
The ratio of own working capital to sources of own funds. |
|
Property mobility coefficient |
The ratio of current assets to the value of all property. Characterizes the industry specifics of the organization. |
|
Working capital mobility ratio |
The ratio of the most mobile part of current assets (cash and financial investments) to the total value of current assets. |
|
The ratio of own working capital to the value of inventories. |
|
|
Short-term debt ratio |
The ratio of short-term debt to total debt. |
The main indicator that affects the financial stability of the organization is the share of borrowed funds. It is generally believed that if borrowed funds make up more than half of the company's funds, then this is not very good. good sign For financial stability, the normal leverage ratio may fluctuate for different industries: for trading companies with large turnovers, it is much higher.
In addition to the above ratios, the financial stability of an enterprise reflects the liquidity of its assets in comparison with liabilities by maturity: the current liquidity ratio and the quick liquidity ratio.
Autonomy coefficient
Autonomy coefficient(financial independence ratio) characterizes the ratio of equity capital to the total amount of capital (assets) of the organization. The ratio shows how independent the organization is from creditors.
Capitalization ratio
Capitalization ratio(capitalization ratio) is an indicator that compares the amount of long-term accounts payable with the total sources of long-term financing, which include, in addition to long-term accounts payable, the organization's own capital. The capitalization ratio allows you to assess the adequacy of the organization's source of financing for its activities in the form of equity.
Reserves coverage ratio
Reserves coverage ratio- This is an indicator of the financial stability of the organization, which determines the extent to which the organization's material reserves are covered by its own working capital.
Asset coverage ratio
Asset coverage ratio (asset coverage ratio) measures the ability of an organization to repay its debts with existing assets. The ratio shows what part of the assets will go to cover debts.
Investment coverage ratio
Investment coverage ratio- this is a financial ratio showing what part of the organization's assets is financed from sustainable sources: own funds and long-term liabilities.
Interest coverage ratio
Interest coverage ratio(interest coverage ratio, ICR) characterizes the organization's ability to service its debt obligations. The indicator compares earnings before interest and taxes (EBIT) for a specific period of time (usually one year) and interest on debt obligations for the same period.
Equity / Balance = p.1300 / p.1700
End of 2013 1930008/3293652=0.586
Early 2013 1634816/2809673=0.582
It characterizes the independence of the enterprise from borrowed funds and shows the share of own funds in the total value of all funds of the enterprise. The normative value is >0.5, which means the level of independence of the JSC "VOMZ" enterprise from creditors is normal and in case of a demand to repay all debts, the enterprise will be able to satisfy them by realizing 42% of equity capital formed at the expense of own sources.
Financial stability ratio
(Equity + Long Term Liabilities) / Balance = (p.1300 + p.1400) / p.1700.
End of 2013 (1930008+91159)/3293652=0.61
Early 2013 (1634816+3912)/2809673= 0.58
The share of funding sources that an enterprise can use for a long time amounted to 61%. Guideline value?80%, i.e. this suggests that the enterprise JSC "VOMZ" is dependent on external sources funding and future instability is possible.
Ratio of borrowed and own funds (shoulder of financial leverage)
Borrowed and borrowed sources / Equity = (p.1400 + p.1510) / p.1300.
End of 2013 (91159+152431)/1930008=0.13
Early 2013 (3912+0)/(1634816)=0.002
Shows how many units of borrowed funds account for each unit of own funds. The dynamics by the end of the year is positive, which indicates a greater dependence of the enterprise on investors and creditors. Enterprise Recommended Value< 0,7. На ОАО «ВОМЗ» данный показатель равен 0,13, что говорит о высокой финансовой устойчивости предприятия.
Permanent asset index
Non-current assets / Equity capital = p.1100 / p.1300.
End of 2013 1191181/1930008=0.62
Early 2013 937563/1634816=0.57
The fixed asset index shows what proportion of sources of funds provide financing non-current assets enterprises, i.e. the core is often productive capacity.
Agility factor
Own working capital / Equity capital = (s.1300 - s.1100) / s.1300.
End of 2013 (1930008-1191181)/1930008=0.38
Early 2013 (1634816-937563)/1634816=0.43
Shows what part of your own working capital is in circulation, i.e. in the form that allows you to freely maneuver these funds, and which is capitalized. The ratio should be high enough to allow flexibility in the use of the enterprise's own funds.
A decrease in the indicator indicates a possible slowdown in the repayment of receivables or a tightening of the conditions for granting a trade credit on the part of suppliers and contractors. The increase indicates a growing ability to repay current liabilities.
The organization does not use long-term loans and borrowings, since the sum of the maneuverability coefficient and the fixed asset index is equal to one. Own sources cover either fixed or working capital, therefore the sum of fixed assets and non-current assets and own working capital in the absence of long-term borrowed funds is equal to the amount of own funds:
The coefficient of security of current assets with own working capital
Own working capital / Current assets = (p. 1300 - p. 1100) / p. 1200.
End of 2013 (1930008-1191181)/2102471=0.35
Early 2013 (1634816-937563)/1872110=0.37
It characterizes the presence of own working capital of the enterprise, necessary for its financial stability. Normative value =0.1, which indicates the ability of the enterprise to conduct an independent financial policy.
The ratio of the provision of material reserves with own working capital
Own current assets / Stocks = (p.1300 - p.1100) / p.1210.
End of 2013 (1930008-1191181)/ 929 206 =0.79
Early 2013 (1634816-937563)/ 768,646 =0.91
Shows how much of reserves and costs are financed from own sources. It is believed that the security factor inventories own funds should change within 0.6 - 0.8, i.е. 60-80% of the company's reserves should be formed from its own sources. At the JSC VOMZ enterprise, 79% of the company's reserves are formed from its own sources, which indicates its financial stability.
The coefficient of the real value of fixed assets and material circulating assets in the property of the enterprise
(Fixed Assets + Inventory) / Balance = (line 1150 + line 1210) / line 1600.
End of 2013 (1099172 + 929206)/3293652=0.62
Early 2013 (871401 + 768646)/2809673 = 0.58
Determines what proportion of the value of property is the means of production. Shows what potential the company has in the event of the emergence of new partners and security production process means of production. Based on economic practice data, it is considered normal to limit when the real value of the property is more than 0.5 of the total value of assets. Drawing a conclusion, we can say that the company has a production potential, and it is advisable for suppliers or buyers to enter into an agreement with them.
Drawing a conclusion after analyzing the financial stability of the JSC "VOMZ" enterprise, we can say that it is dependent on external sources of financing, has sufficient autonomy and is able to satisfy the requirements of the creditor to repay debts from its own sources. Also, the financial stability of the enterprise is indicated by 79% of the formed reserves from its own sources and production potential, which is also included in the standard indicators: 0.62.
Often, an entrepreneur does not have enough own capital to carry out his main activity, so he resorts to various kinds of external loans. What it is and how to manage it, we will consider in this article.
The essence of borrowed funds
Borrowed funds are a certain part of working capital legal entity, which is not his property and is replenished by attracting commercial bank loans, issue loans or through other methods convenient for the entrepreneur. It is important to understand that such infusions of a business entity are subject to return.
However, borrowed funds are not provided to everyone, and even more so unreasonably. Therefore, in order to attract this kind of financial investment, an entrepreneur needs to make some settlement manipulations that prove the need to attract third-party capital in favor of their own current assets.
It can be said that this is both good and bad. The positive aspects of the loan lie in the fact that in this way the business entity will be able to bring its offspring out of the crisis state as quickly as possible, and at the same time, it will establish contact and increase the degree of trust in relations with external creditors. Well, on the other hand, there are some kind of obligations to third-party organizations, which is also not good.
Borrowed funds and principles of their formation
Every company of a commercial nature exists in order to bring profit to its owners. Therefore, the activities of a business entity should be built in such a way that the proceeds are sufficient not only to pay off obligations to external creditors, but also to increase their own production or other working capacities. 
The turnover must be profitable, otherwise it makes no sense, so it is extremely important to understand that the key to a successful loan is when the amount of net profit exceeds the monthly amount payable to your benefactors.
Borrowed funds in their formation are quite diverse, since there are many alternatives that differ in the degree of obligations, the nature of the issue and the timing of the provision of finance. Therefore, with special attention it is necessary to consider the choice of a lender on the basis of the proposed conditions.
Ways of external financing
As mentioned above, the attraction of borrowed funds is carried out in any way convenient for a business entity. In modern practice, there are a number of the most common sources for the implementation of this operation:
- Domestic commercial banking institutions (may provide short-term loans, enter into factoring agreements or assignment of rights of claim, carry out bill transactions).
- Specialized leasing corporations (carry out property lease operations).
- Various commercial entities management (mutual settlements and factoring operations, tolling, commodity loans).
- Investment funds (as well as commercial banks, are engaged in the assignment of claims and bill transactions).
- State bodies (may give the right to tax deferrals).
- Shareholders and owners (specialize in dividend operations).
Debt management
For successful management of accounts payable, it is extremely necessary to build a competent accounting policy: draw up a planning budget, calculate the borrowing ratio, which, in turn, can show a qualitative and quantitative characteristic of the state of current affairs based on relations with external investors. 
When the share of funds raised in a company is large enough, a strategic plan should be developed to maintain a financially stable position in a competitive market, so as not to violate agreements with borrowers and not remain at a loss.
For this, the planned characteristics of existing borrowed funds will also be useful, an important role is played by the liquidity ratio, which indicates the maturity and turnover of the existing capital of a business entity.
Essence of own funds
We must understand that it is not only impossible to build a huge financial empire on solid borrowed capital, it is extremely difficult to stay afloat in today's, sometimes tough, competitive market conditions. If your capital is not enough to conduct business, it is important that own and borrowed funds are in the right ratio. 
The first, in turn, are already formed current assets that are allocated from statutory fund enterprises, while additional capital may also participate, formed due to the following factors:
- with surplus after revaluation of the main fund;
- if the company is joint stock company, then it can have share premium;
- funds can also be received free of charge for the purpose of acquiring production-related goods and services;
- various state appropriations provided by the Federal Treasury of the Russian Federation.
The ratio of own and borrowed funds
When attracting third-party capital and actively using it for turnover purposes, it is recommended to monitor the qualitative and quantitative characteristics of the behavior of the financial stability of the enterprise as a whole. Often, in order to characterize the ratio of own and borrowed funds as accurately as possible, Gearing ratios are calculated using the following formula:
(Amount of long-term liabilities + Amount of short-term liabilities)/Amount of equity capital.
The resulting figure indicates the dependence of the enterprise on third-party sponsors, and the more the coefficient exceeds 1, the higher the degree of this dependence. 
An entrepreneur must understand that for the successful functioning of a business entity, borrowed capital should not “rule the show” and dictate the conditions for the purchase of goods and services. Therefore, the less the dependence of own funds on borrowed funds, the more liquid and profitable the company's activity will be.
